2021 FIRST QUARTER INVESTOR LETTER
The first quarter proved to be exceptional for cryptocurrency, in terms of performance, as well as milestones marking the broader adoption and acceptance of digital, decentralized currencies. Bitcoin reached an all-time high of $61,893 during the first quarter, after opening the year at $28,987. During the first quarter, three major corrections that were on average -26% occurred. We expect to see more of these corrections as we move closer to our conservative price target of $100,000 per Bitcoin sometime later this year.
Bitcoin Corrections Q1 2021
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A couple of the most notable highlights from the 2021 first quarter:
● Bitcoin surpassed $1 trillion in total market-cap for the first-time.
● Tesla bought $1.5 billion in Bitcoin, now accepts Bitcoin as payment, and is running their own nodes and planning to hold all the Bitcoin they take-in.
● Microstrategy and its CEO, Michael Saylor continued to lead the corporate balance sheet charge, buying over $1 billion worth of Bitcoin financed by oversubscribed debt offerings.
● A handful of financial businesses announced plans to form Bitcoin ETFs, including a move by Grayscale to convert their closed-end trust (GBTC) into a full-blown ETF. ● Goldman Sachs re-started its crypto desk, Morgan Stanley began offering private wealth clients access to Bitcoin, and Blackrock signaled an intent to allocate to Bitcoin. ● Visa announced they are going to be using the Ethereum blockchain to accept and settle crypto-payments.
● BNY Mellon, the oldest bank in the US, is planning to support digital assets later this year.
● Crypto and blockchain startups raised $2.6 Billion in funding in Q1. This surpassed all the funding raised in 2020 and is a record for any single quarter.
Parkour Ventures I (PVI) launched on February 1st and returned 107%(gross, before fees) for the last two months of the quarter. During the same period, Bitcoin returned 74% (33.8k-58.8k) and Ethereum returned 43% (1325-1900). A weighted average buy-and-hold strategy of 80% Bitcoin and 20% Ethereum would have returned 68%. We are pleased with the performance of the fund and our trading desk while we were ramping up operations. In addition to our core cryptocurrency holdings, we aim to use market volatility to generate additional alpha for the fund. So far, we have batted .500 in out-performing during major corrections, trading the February 21st correction very well. Returns generated roughly on par with Bitcoin and Ethereum during the late March correction. Our goal is to keep, or improve on this batting average throughout the remainder of this bull market.
Corrections are a time for PVI to shine and to create alpha for our partners. We feel well prepared and battle-tested as we enter into the second quarter. Moving forward, we expect PVI’s relative performance to accelerate moving forward due to efficiencies on our trading desk and our side-pocket investment into our DeFi partner fund, Linkpad (Linkpad VC) – with an allocation of approximately 15% of the fund’s assets under management at the time of deployment.
We are extremely excited about the DeFi space and its potential for massive growth. We are privileged to have extremely capable operators in the DeFi space, allocating investments into select yield farms and into some of the most exciting new DeFi projects. Akin to the saying “software is eating the world,” we believe DeFi is in the process of eating the legacy financial system. In our opinion, there is a high probability that the DeFi projects being built today will soon present such a threat to existing financial companies, they will either be forced to acquire them in an all-out merger-mania, or risk losing permanent market share to competitors with better technology and more innovative business models.
The last halving event in May 2020 jump-started the latest Bitcoin bull-run as forecasted by the Stock-to-Flow model. In the first quarter of 2021 the value of Bitcoin followed the model more closely than it has in the past and on the first and last days of the quarter, the price of Bitcoin closed within +/-3% of the model’s predicted price. The largest deviation from the stock-to-flow trend line was seen in mid-February, after a large bullish news cycle revolving around the Federal economic stimulus; an expected rise in inflation; and companies adding Bitcoin to their balance sheets.
What Tesla Adding Bitcoin to its Balance Sheet Means for Crypto
While several companies directly involved in cryptocurrencies had already disclosed Bitcoin holdings, a company like Tesla (a Top 10 market-cap in the S&P 500 with no direct tie to cryptocurrencies in its business model) adding Bitcoin to its reserves draws a lot of attention. In fact, it caused several other non-crypto related companies to begin to look into the space and to consider following suit. Several S&P company executives spoke about this possibility in interviews following the news. Furthermore, Tesla set a bold example, by not just converting 1% or 5%, but 10% of their cash holdings into Bitcoin. According to a study published by ARK Invest, if all S&P 500 companies put just 1% of their cash balance into Bitcoin, this would represent an increase in price of around $40,000. If this number is increased to 10%, this would project a price target of over $400,000. While thiswon’t happen all at once, it is a strong positive catalyst for Bitcoin. As we head into the second quarter we will be watching for quarterly SEC filings of other S&P 500 companies that have since added Bitcoin to their balance sheets.
Bond Yields & Bank Reserves
After a very strong run for cryptocurrencies and equities in the beginning of February, the market experienced a correction, as we saw a rotation, fueled by a large increase in bond yields. To understand the behavior of bond yields over the past month, we have to go back to April 1, 2020, when the Federal Reserve aggressively provided support for the economy by buying bonds at an increased rate, as well as allowing banks to increase their bond buying. The Federal Reserve requires that banks keep a specific leverage ratio requiring them to hold a certain percentage in cash relative to their invested capital. To provide liquidity to the markets during the pandemic, the Federal Reserve announced they would exclude a portion of treasury and bond buying from the calculation of banks’ leverage ratios. This provided a large incentive for banks to buy bonds, as it allowed them to invest a larger portion of their capital into fixed income instruments. The Fed’s actions boosted demand and resulted in bond yields remaining at historically low levels for the past year. However, the relaxed leverage ratio calculations expired at the end of Q1. The sunsetting of this exclusion decreased the banks buying power. This, combined with gradually increasing inflation expectations, caused a spike in bond yields and a rotation in portfolios to reflect these new rates. Nevertheless, the yield for the 10yr treasury note still remains below 2%, and many other larger institutions have begun to look elsewhere for stable return opportunities.
Cash and Carry
While cryptocurrencies have historically been volatile assets, the space continues to develop and opportunities emerge attracting investors with lower risk profiles, as well as your typical speculator. With the expansion of derivative markets around cryptocurrencies, investment strategies are arising that revolve around providing liquidity to those markets without taking on the speculative risk of betting for or against the underlying asset. One such example of this is the “Cash and Carry” trade, which involves buying the underlying asset while simultaneously
selling a futures contract against it. The investor that employs this strategy provides liquidity to speculators and traders on the market, while benefiting from the time decay as the difference between the underlying asset and the futures contract decreases. The “Cash and Carry” trade is a low-risk arbitrage strategy that does not rely on the price movement of the underlying asset. The current “Cash and Carry” trade for the June Bitcoin quarterly futures contract offers a return of around 8% for the rest of the quarter or an annualized return of around 40%. As exchanges that offer derivative trading become more and more prominent, this type of trade begins to attract larger institutions and big players looking for low-volatility, consistent returns. It is an extremely positive development and is evidence of a maturing asset class.
Bitcoin and Ethereum Options
As more funds and institutional investors are introduced to cryptocurrencies, cryptocurrency investors are also introduced to traditional derivatives strategies such as options. Options provide a way for investors to speculate on the price of an underlying asset by a specific date, and also provide an opportunity for investors to hedge their portfolios to decrease their exposure to short-term market volatility. Like any other market, option orders are public, so investors can see at what prices most option buyers and sellers are opening contracts; this is called “open interest”. A high concentration of open interest can indicate a general market consensus of where the asset “should be valued”. This past quarter, a record breaking $8 billion worth of Bitcoin and Ethereum option contracts expired on March 26th, the end-of-quarter option expiry date. This latest options expiry contributed to a sell-off in both Bitcoin and Ethereum in the week leading up to March 26th as prices returned to where most option contracts were struck prior to the expiry date. However, large option expiry events are not always a negative influence on the price; instead, they offer more ways for investors to value an asset, and can act as a stabilizing force, resulting in a reversion to the mean. This can help dampen overly volatile moves, such as those seen in the 2016-2018 cycle. Options are an integral part of a healthy market. Their increased use during this past quarter is a positive sign for Bitcoin and Ethereum going forward.
Bitcoin Blockchain Health Check
The Bitcoin network is protected and run by ASIC miners. The total amount of computing power, or the network hashrate, is an important metric when assessing the overall health of the Bitcoin network and the direction of future price movements. Currently, the network hashrate (and difficulty adjustment) is at an all-time high of around 155 Ehash/second, which is extremely bullish.
Other high-signal network metrics, such as addresses with non-zero balances and active addresses, are also at all-time highs. As noted above, the overall Bitcoin market-cap exceeded
$1 trillion for the first time in history, and fees are still below the highs witnessed during the 2017 bull-run. Bottom line: the network is in fantastic shape!
Parkour Price Outlook
Looking forward to the second quarter of 2021, we again refer to the Stock-to-Flow model to note where the current price of Bitcoin is in the current cycle. As of April 15th, Stock-to-Flow models the price of Bitcoin to be roughly between 62.9k and 66.5k, while projecting an end-of second-quarter price target between 83.5k and 90k. The second quarter will also bring the first round of quarterly earnings for many companies who have recently added Bitcoin to their balance sheets. Given Bitcoin’s recent performance, we expect this to be bullish news that will continue to grab the attention of more and more investors from the equities space. Furthermore, as vaccine distribution is increased, we also expect to see a continuation of the broader economy reopening. Many expect this will lead to an increase in the velocity of money, and therefore, a large increase in inflation as the effects of the economic stimulus and increases in the money supply take effect. As a uniquely deflationary asset class, Bitcoin is in prime position to benefit from inflation in fiat money. Therefore, due to the Stock-to-Flow supply and demand factors, increased corporate involvement, and its utility as an inflation hedge, we believe Bitcoin is set-up for another phenomenal quarter as it continues its March towards $100,000 and above.
Thank you for your trust and for being a partner with us on this journey.
The Team @ Parkour Venture Fund LP